1.1 Introduction to BM

Question 1

Business plan

Answer 1

Business plan refers to the document that sets out the business idea, its goals and objectives and other details of how it will operate (e.g. marketing, operations and finance). Often animportant part when trying to raise external sources of finance.

Question 2

Businesses ‘What is a business?’

Answer 2

Businesses are organisations involved in the production of goods and/or the provision of services

Question 3

Consumers

Answer 3

Consumers are the people or organisations who actually use a product

Question 4

Customers

Answer 4

Customers are the people or organisations that buy a product

Question 5

Entrepreneurs

Answer 5

Entrepreneurs are owners or operators of an organisation who manage, organise and plan the other three factors of production. They are risk takers who exploit business opportunities in return for profits

Question 6

Intrapreneurship

Answer 6

Intrapreneurship is the act of behaving as an entrepreneur but as an employee within a large business organisation. Intrapreneurs work in an entrepreneurial capacity, with authority to create innovative profucts or new processes for the organisation

Question 7

Needs

Answer 7

Needs are the basic necessities that a person must have to survive; food, water, warmth, shelter and clothing

Question 8

Primary sector

Answer 8

Primary section refers to businesse involved in the cultivation or extraction of natural resources; farming, mining, quarrying, fishing, oil exploration and forestry

Question 9

Secondary sector

Answer 9

Secondary section is the section of the economy where the business activity is concerned with the construction and manufactoring of products

Question 10

Tertiary sector

Answer 10

Tertiary sector refers to the section of the economy where business activity is concerned with the provision of services to customers

Question 11

Quoternary sector

Answer 11

Quoternary sector is a subcategory of the tertiary sector, where businesses are involved in intellectual, knowledge-based activities that generate and share information, e.g. information communications technology and research organisations

Question 12

Sectoral change

Answer 12

Sectoral change refers to a shift in the relative share of GDP (or national output) and employment that is attributed to each business sector

Question 13

The role of business in combining human, physical and financial resources to produce goods and services

Answer 13

Management guru Peter Drucker famously said that the
only purpose of a business is to create customers, i.e. the role
of businesses is to combine human, physical and financial
resources to create goods and services in order to satisfy the
needs and wants of people, organizations and governments.

Question 14

What are the 4 main business functions?

Answer 14

-human resources -finance and accounts -marketing -operations

Question 15

Human resources

Answer 15

The human resources (HR) department
is responsible for managing the personnel of the organization.
In managing people, the HR department is likely to deal with
the followingissues: workforce planning, recruitment, training,
appraisal,dismissalsand redundancies, and outsourcing human
resource strategies (see Unit 2.1).

Question 16

Marketing

Answer 16

The marketing department is responsible for
identifying and satisfying the needs and wants of customers.
It is ultimately in charge of ensuring that the firm’s products
sell. This is done through a series of activities such as market
research, test marketing, advertising and branding. Functions of
the marketing department can be summed up as the traditional
four Ps of marketing (see Unit 4.5)

Question 17

Finance and accounts

Answer 17

The finance and accounts department
is in charge of managing the organization’s money. The finance
and accounts director must ensure that accurate recording
and reporting of financial documentation takes place. This is
to comply with legal requirements (e.g. to prevent deliberate
understating of profits to avoid corporate taxes) and to inform
those interested in the financial position of the business (such
as shareholders and potential investors). Finance and accounts
topics are covered in Units 3.1-3.9.

Question 18

Operations

Answer 18

Also known as operations management
or production, this functional area of an organization is
responsible for the process of converting raw materials and
components into finished goods, ready for sale and delivery
to customers. Examples of production include the extraction
of crude oil, car manufacturing and the construction of roads.
Operations also applies to the process of providing services to
customers as in the case of hotels, restaurants, beauty salons
and financial institutions. Operations topics are covered in
Units 5.1-5.7.

Question 19

Reasons for starting up a business

7p

mnemonic GET CASH

Answer 19

1. Growth
2. Earnings
3. Transference and inheritance

Many self-employed entrepreneurs view their
business as something that they can pass on (transference) to
their children (inheritance) to give them a sense of security
that might not be possible if they chose to work for someone else.

4. Challenge

Some people might view setting up and running
a business as a challenge. It is this challenge that drives them
to perform and what gives them personal satisfaction.

5. Autonomy

Working for someone else means exactly that.
Employees have to follow the instructions and rules set by
the organization that they work for, such as the conditions of
employment, working hours, benefits and holiday entitlement.
Conversely, being self-employed means that there is autonomy
(independence, freedom ofchoice and flexibility) inhow things
are done within the organization.

6. Security

Similarly, there is usually more job security for
someone who is their ownboss. Bycontrast, employees can be
dismissed, made redundant, or even replaced by technology.

7. Hobbies

Somepeople mightwant to pursuetheir passion or
to turn their hobby into a business. Successful entrepreneurs
have a passion for what they do and this is made easier if the
nature of the work is directly related to their interests.

Question 20

Steps in the process of starting up
a business AO2

5p

Answer 20

1. Write a business plan.
2. Obtain start-up capital.
3. Obtain business registration.
4. Open a business bank account.
5. Marketing.

Question 21

Factors to consider when setting up a business

9p

Answer 21

1. Business idea

A feasible business idea is needed.This might be done by identifying and filling a niche (unfilled gap) in a market or by providing products that have a unique sellingpoint. Amazon.com (online book retailing). Dell (custom-made computers) and Dyson (bag-less vacuum cleaners) are examples of successful businesses
based on innovative ideas. It is also possible to enter existing markets although these may be saturated so the chances of success might be lower.

2. Finance

Finance is needed to fund business activities, such as manufacturing and marketing of the firm’s products. However, finance is usually the key barrier to setting up a new business. Record keeping of financial accounts (see Unit 3.4) also needs to be done. Many firms will hire accountants to help them do this.

3. Human resources

Human resources are needed at all stages of business activity, from the design and development of a product to delivering it to the consumer. Entrepreneurs have to consider the need for hiring, training, retaining and motivating their staff.

4. Enterprise

Entrepreneurial skills are required to successfully plan, organize and manage the business. Effective leadership and negotiation skills are required to deal with different stakeholder groups (see Unit 1.4) such as employees, suppliers and the government. Entrepreneurs must also have self-confidence and a
passion for what they do.

5. Fixed assets

Fixed assets are needed, such as premises and capital equipment. The location decision (see Unit 5.4) is also a crucial but a problematic one; a popular location improves the chances of attracting customers, but the cost of land and property Is much greater.

6. Suppliers

Suppliers are needed to provide the business with its raw materials, finished stock of products and support services. Negotiations over issues such as prices and delivery times also need to be undertaken.

7. Customers

Customers need to be attracted because without them the business will fail.This might be done by using market research to create products that are desirable, available at the right prices and sold in the right places.

8. Marketing

Marketing is essential, irrespective of how good a business idea might be. Many investors turned down Anita Roddick’s idea of The Body Shop and J.K. Rowling’s Harry Potter books. Marketing is needed to convince lenders and buyers that the product is a winner.

9. Legal issues

Legalities (legal issues) also need to be considered, e.g. consumer protection laws, copyright and patent legislation and employment rights. Infringement of legal issues can present huge problems for a business, e.g. if a restaurant breaks food hygiene laws, it might be required to cease all operations.

Question 22

Problems that a new business may
face AO2

Answer 22

1. Lack of finance

All businesses need finance for the purchase of fixed assets, such as premises, buildings, machinery and equipment. However, most owners of new or small businesses do not have the credentials to secure external funding without major difficulties. Even if entrepreneurs are able to borrow money, the funds
may be insufficient or the relativelyhigh interest charges might seriously affect the cash flow position of the firm (see Unit 3.7). Hence, new business owners often have to remortgage their own homes to raise the finance needed, thereby offering the lender more collateral (financial security in case borrowers fail to repay the loan).

2. Unestablished customer base A major problem facing new businesses is attracting customers, i.e. building a customer base. The problem is intensified when there are well established rivals that already operate in the market. Customer loyalty is built over a long period of time, which may require marketing know-how and large amounts of money.
3. People management problems

New businesses may lack experience in hiring the right staff” with all the
necessary skills. This can lead to poor levels of customer service and the need to retrain staff or to rehire people, all of which can be very expensive. Moreover, new businesses might not know the ideal organizational structure (see Unit 2.2) that best suits their needs.

4. Production problems

It can be difficult for new
businesses to accurately forecast levels of demand so they are more likely to either over produce or under produce. Overproduction tends to lead to stockpiling,
wastage and increased costs (see Unit 5.5). By contrast, underproduction leads to dissatisfied customers and a loss of potential sales.

Question 23

Summary why set up a business

4 ‘tos’ + 3

Answer 23

In summary, people set up their own businesses to satisfy their
personal desires such as:

1. to be their own boss
2. to fulfil a personal vision
3. to have the opportunity to achieve success
4. to live a more extravagant lifestyle (if and when the business is
   successful) .

However, a significant number of new businesses
fail to survive. There are three interrelated reasons for this:

1. a lack of cash in the business
2. poor costcontrol

3.management
incompetence.

Question 24

Contents of a typical business plan

6p

Answer 24

1. The business

2 The product

3. The market
4. The finance
5. The personnel
6. The marketing

Question 25

The business (bus plan)

5p

Answer 25

• Name and address of the proposed business (for new businesses)
• Cost of premises and other start-up costs (for new businesses)
• Details of the owner(s) and past business experience
• The type of business organization, e.g. sole trader or partnership
• Quantifiable goals and objectives of the proposed business or project

Question 26

The product (bus plan)

6p

Answer 26

• Details of the good(s) and/or service(s) being offered
• Supporting evidence showing why customers will pay for the product(s)
• Where and how production will take place, e.g. the equipment that Is needed
• Details of the suppliers of resources such as raw materials or components
• Costs of production, I.e.the expected costs of operating the business
• Pricing strategies to be used

Question 27

The market (bus plan)

4p

Answer 27

• The expected number of customers or the forecast level of sales
• The nature of the market such as customer profiles and market segmentation
• The expected growth of the market In the foreseeable future
• Competitor analysis, e.g. market share, strengths and weaknesses

Question 28

The finance (bus plan)

7p

Answer 28

• Proposed sources of finance, i.e. how the business or project will be funded
• Break-even analysis (see Unit 3.3)
• Security (financial guarantees) in case the borrower defaults on the loan
• Cash flow forecast and steps to deal with cash flow problems (see Unit 3.7)
• Forecast profit and loss account (see Unit 3.4) for the first year of trading
• Forecast balance sheet (see Unit 3.4) showing the firm’s financial health
• Aforecast rate of return for Investors of the business venture

Question 29

The personnel (bus plan)

3p

Answer 29

• The number and Job roles of the workers likely to be employed
• Organizational structure of human resources (see Unit 2.2)
• Details of payment systems, e.g. remuneration such as wage rates

Question 30

The marketing (bus plan)

4p

Answer 30

• Market research and test marketing (see Unit 4.4)
• The distribution plan, detailing where the products will be sold
• Details of the promotional mix used to target customers
• Any unique or distinctive selling point to differentiate itself from rivals